Friday, October 30, 2009

The House is Done!

Well, almost. I haven't remodeled the bathrooms and a couple of closets yet, but for all intents and purposes, my family's two year journey to remodel the house we bought. The major project this year was the exterior. Below is a photo taken shortly after we bought the home. The front had a combination of mottled brownish brick facade with gray wood shake siding. The sides and back were gray steel siding. One of the goals that we had were to make the siding all of one type. We also didn't like the color of the brick since it basically looked dirty all of the time. And gray always looks dirty, too!

The Preparation
Looking around our neighborhood, there aren't a lot of houses with contrasting colors. There is a blue house with white trim. A couple of yellow houses with red/maroon trim. And a white house with green trim. So, we wanted to definitely add some contrasting color. We chose white as our trim color (soffits, windows, etc.) and decided to do the outside corner siding pieces in white as well to help accent the house.

Next, we looked at some various colors of siding and chose one called Stone Clay. It is a muted brown to tan and helps match the brown earthy tones that permanate our neighborhood, without looking identical to them. We selected a 5 inch dutch lap profile to be distinct (no one else on the street has dutch lap although a couple of homes on the street behind us do).

Finally, the brick had to change. Masonry is an expensive job to replace. I thought of painting the brick to get it a different color. The issue was, I didn't want it to look painted. Which meant instead of using the spray gun and taking an hour to do all of the brick, each brick would have to be painted by hand in order to keep the mortar joints their natural color. After painting several hidden pieces of brick, we settled on a color Sienna Red. We thought the brick red color was a good contrast to the Stone Clay and White and would help to accentuate the house. Also, we planned on laying down a red mulch in the flower beds and get rid of the gravel covering. All of this was done by April of this year and the fun part really began.

At the beginning of the year, we had budgeted an amount to get the siding done. After talking with some neighbors on their homes, I figured that we could hire it out and come in about for what we budgeted. But, my wife and I aren't like that. We like to squeeze as much out of our budget as we can. So, I priced out the materials myself and came up with a figure that was about 1/3 of the budget. So we talked about it and decided to replace the windows as well. We would install everything ourselves, and the total cost left about 1/3 of the original budget for any contingencies. For anyone about to embark on a home remodeling project, contingencies ALWAYS happen. If you haven't put room in your budget for them, you are going to be hurting later. If you have, and the contingencies are not as large as expected, you can always buy guns and furniture.

After our trip to Disneyland in May, I started off by power washing the brick. It is important to wash brick before painting it since the paint helps to seal up pores and if there are bird droppings on it, then you have basically sealed these onto the brick. Depending on the type of bird droppings, there may be chemicals that combine with the paint or form on their own to eat away at the brick. Power washing is relatively easy and only took about 1 hour. The next part was letting the brick dry for about 3 days. We had a good stretch of sunny weather to help us out. You want the brick dry so that excess moisture isn't trapped underneath the paint. This could surface later and bubble up the paint.

By Memorial Day, I was ready to paint. I started with the far left section of the garage and painted all of the brick. Going on wet, the paint looked like a satiny pink (it was suppose to be a flat Siena Red). After that section was done, I called my wife out and had her look at it from the street. She looked hesitant, and I said "I know the wet stuff looks pink, but when it dries and the sun dulls it out, it will look red."

"OK, I trust you."

"If you want to change the color, now is the time to do it, since I calculated it is going to take me 20+ hours to paint it brick by brick. "

"No, go on."

And I did. I worked on it about 2 hours a day when I could and was done before the end of June. A couple things to keep in mind. I didn't paint it in the direct sun. I wanted it to dry in the shade. So on sunny days, I would paint sections in the morning and then other sections on the other side of the house creating a jigsaw pattern of "new" brick and the old brick. Also, I didn't paint when it was raining or threatening to rain. During this time, I only had one major mishap when my youngest daughter found the unattended paint can. It was in an out of the way place, and unless you know to look you probably won't find it.

The advantage to painting so early in the process is I didn't have to be careful around the old siding. It was all going away. I did have to watch myself around the garage door and the front door since they were keeping their white trim.

Tear Down
After the paint was all done, the fun part of tearing off the old siding began. Originally, my plan was to tear off one side at a time and then put the new siding up and then go on to the next side. In practice, after tearing off one whole side of the house, I realized, it would be easier to just tear it all off. Metal siding is really easy to tear off if you don't plan on reusing it. Just get it started and pull. About the only thing you have to worry about is the sharp edges. Originally, I wasn't planning on replacing all of the soffit trim, however because of the way the siding was installed, I had to. So contingency #1 came into play (good thing we had room in the budget).

Underneath the siding was 1/8" rigid foam board. This stuff is good for insulation. although, 1/8" doesn't really provide much. Under the insulation was the bare walls of the house. Our house was built 30 years ago and the walls were made of compressed fiber board. Basically a non structural material that wouldn't hold the unless you actually hid studs. All of the homes I have helped build have had oriented strand board (OSB) or plywood walls. I decided to staple on 1/4" OSB over the entire house so that I had a decent solid nailing surface. While putting up the sheets, I made sure that I was nailing it through the fiber board into the wall studs. It wouldn't be good to have a huge section of the wall just fall off.

While tearing off the siding and insulation on one side of the house, I found where someone had been really creative before. At one point in time, there was a slight overhang of the attic portion (about 3") from the lower wall. Whenever they had put the steel siding on, they decided to make this all one plane. So they built up the wall by adding 2x6s (1-1/2 inch thick) and cutting off the sheathing from the attic portion (about 1" thick). This left the only thing keeping the blown in insulation in the attic on this portion of the house being the 1/8" rigid foam insulation that I had just torn off. Needless to say, that was a long Saturday as I had to tear the siding off and then re-sheath that wall in one day, by myself.

Residing Fun
Once all of the siding was off, I piled it up in the backyard. Eventually, I took the old windows to the dump (cost $30) and the old siding to the recycle yard (value $70). Just a quick fact, there was approximately 1300 pounds of siding on my house. After replacing all of the windows and resheathing the house, I put house wrap all around. Housewrap wasn't even required by the building codes until about 10 years ago. The stuff is great. The day after I got the house wrapped we had some decent rainstorms. I was pleased.

With the house wrapped it was time to start the siding. I had left the old starter strips on two adjacent walls after checking to see that it was level along the length. After all of the prep and trim is done, siding goes up very quickly. I had three friends help on a couple of days, but the majority of the house was done solo. For many of the upper pieces, this required some skillful balancing so that I could get the pieces in.

Since I had never hung siding before, I started at the back of the house and worked my way around, that way, I would be able to make all of my mistakes where fewer people see them. I didn't make many mistakes (that I can tell, I'm sure a professional would be able to point out a plethora). I miscut only two large pieces of siding, but was able to use the cut pieces for other places. A hacksaw and a utility knife were all that was needed.

Besides several smashed thumbs (it happens from all of the pounding), I didn't injure myself until I was almost completed. I had four pieces left to cut and was working on the roof in some hard to reach places. I decided to cut a piece in place rather than taking it down to my work bench. Mistake, I slipped with the knife and sliced my index finger, right to the bone. It bled an awful lot and I am sure my roof and front porch looked like a crime scene for a while. I momentarily debated jumping off the roof to the ground (about 12 feet) to save time, but decided it wouldn't be good if I broke a leg since I had already lost one bet with luck.

One of the nice things about getting cut with razor sharp knifes is that the cut is clean, no ragged edges, so it was easy to hold the thing together and wrap some gauze and tape around it. If I had have been in the middle of the project, I would have stopped for the night. However, I pressed on, which reopened the wound and as I was putting the last pieces up, there was blood streaming down my arm (I made sure I wiped it off of the new siding). The only thing left to do on the outside is remove the old chimney, but I'll wait 5 years until I need to replace the roof.

I finished up the soffits over the next two weeks and this is what my house looks like now:

At the beginning of the project, I was going to the range regularly with my wife and friends. After taking my kid brother to the range for his first time in July, I decided to wait until I finished to go again. Sort of like a reward. So, that is the story of my house for now. I have to go load magazines!

Wednesday, October 14, 2009

When ROI Really Isn't ROI

Return on Investment (ROI). It is a rather important number to know, especially if you want to make a good financial decision. Unfortunately, to the novice investor, ROI isn't really ROI. I have been following the stock market and learning about investing since I was in the 4th grade. When I was in high school and college, the dawn of day trading occurred. (Actually, it has always been around but with the internet and low cost online brokerage firms, day trading became something that the "average" investor could participate in). I have always been a buy and hold kind of person. I'll have some funds available for short term trading if I see an opportunity that presents itself, but, 90%+ of my investment funds are for the long haul. Short term trading strategies (i.e. <90 align="left">

First thing that you should understand is where the owners/operators/inventors of these systems get their money. They do not get their money from actually trading with their systems, they get their money from selling you the system. Now, there is nothing inherently wrong with this. You just need to realize that while the creator of a certain system may boast of the great returns that are possible, it doesn't mean that he is willing to put his own money on the line. STS (again not the real name) sells for $350 to 600 per year depending on how long of a contract you buy. Judging by the website and having run a web business before, I would say that STS could get by with 3 people working full time. If they had 5000 paying customers, the company would gross at least $1.75 million. Assuming company expenses of $250K (this is just a computer program in the end), it would leave about half a million dollars for each of the 3 people. Not a bad salary at all, and that is without actually making a single trade. Don't you love capitalism?!!

Like I said before STS has done a far better job of providing their potential customers the resources to evaluate their system than most people. Which brings us to the next step. Investing in any system has to beat the market average, or else you are just wasting your time. I happen to use the S&P 500 as my benchmark. Any day the markets are open I can buy or sell S&P Depository Receipts (SPY) which is an exchange traded fund that tracks the S&P 500 index. Therefore, any system has to advertise that it beats the market average. STS does this and boasts a 36% annual rate of return (using their data I calculated 31%) while the S&P over the same period had a 4.0% annual rate of return.

After seeing that they boast a return that beats the average, I look to see if they have a substantial track record. STS has a 14 year history (which coincides with the beginning of the tech bubble in the late 90s). Any system (or mutual fund) should have at least a 10 year history to be properly analyzed. The longer the better. This allows one to look back and see how the system did in both good times and bad. If you are a novice, only look at systems that have more than a 10 year track record.

The last step before looking further is to see the year by year performance. While you know that the average annual return is beating the market, what you need to do now is see how year by year it compares. I like to look at this as an honesty check. No one can beat the market all of the time. So, I am looking to see that in a few years, the return was negative and in a few years, the system didn't beat the market. I would be very suspicious of any system that never had a down year or always beat the market. Madoff did that and his investors were happy taking their checks to the bank. Until it all came to light that there was no investments. It is possible that there is a system that always wins. But why risk it? STS had 2 years with negative returns and 2 years with underperforming the market. So from this angle it looks legitimate enough to examine further.

To continue on with any analysis, the system will have to provide you with a history of trades (either actual or recommended). STS has tens of thousands of recommendations in its history and operates on the basis of buying and selling at the market open. I took a random sample of their trades to make sure that the prices matched the historical values. No discrepancies. Another positive thing that I noticed is that all of the trades were from companies on the two big exchanges NYSE and NASDAQ. Several trading systems rely on over-the-counter and penny stocks and are really just a place to gamble your money away.

So, my initial impressions of STS are that they definitely believe in their system and are willing to provide the trade information to back it up. Now, that doesn't mean I'm recommending it, just that I haven't thrown it in the trash yet. I downloaded all of the reccommendations and went through the STS website to re-calculate all of the numbers that I could. I came up with similar numbers to what they had, so I will use the numbers I calculated in my spreadsheet from now on. ROI is the percent return on a given investment. If I invest $100 and sell it for $110, then my ROI is 10%. This is from the following formula:
100 * (Final-Initial)/Initial
However, when calculating the ROI for a series of stock trades, one has to find the return for each trade ( (Sell -Buy)/Buy) and then average all of those trades. For STS, I found it to be 0.86% per trade. Now in order to compare this to the return of the S&P 500 (4% per year over the lifetime of the STS system), I also calculated the average length of time a trade was open (8.2 days). Dividing 365 days (1 year) by 8.2 and then multiplying by 0.86% I get 31%. So in the end, 0.86% per trade may sound small, but since each trade occurs over a period of just 8 days, it adds up.

This is where the analysis comes of with some problems. First, the ROI is based on the opening and closing prices only. However, there are two major expenses to consider when trading short term: commissions and taxes. A commission is paid each time a stock is bought or sold. If all of the STS reccommendations were acted on, over a 14 year period, with a $10 commission, an investor would have paid $220K to his broker. This should be the first clue that this system is geared towards investors with several hundreds of thousands of dollars to invest.

Second, I did an analysis of the number of positions that were open at any one time, I found that a maximum of 501 positions were open at one time. This would indicate that even with a nominal investment of $1000 for each reccommendation, one would need at least $500,000 to be able to use this system. So I went back to the website to see if these issues were addressed.

In the question and answer section, the creator of the system addresses commissions in the first question. Basically, he says that you are trying to minimize the percentage of the trade that is paid in commission - this is good advice. Unfortunately, for the small time investor, this means increasing the amount invested on each trade. STS recommends at least $8000 per trade. (So to cover the maximum of 501 open positions, one would have to have $4 million to use). I found this odd, since in the statement above he says that you could profitably participate with as little as $10000.

The total open positions issue is addressed in another question. STS acknowledges that to exactly match the ROI, one would have to put equal amounts of money in every recommendation. They also acknowledge that this isn't practical since in some cases you would have to have millions of dollars in your account (which is what I showed above). So, they say you should develop your own strategy based on their recommendations to approximate the ROI. Alright, this is starting to sound like the "system" doesn't work. In other words, their system will shrink my possibilities each day from 5000 down to 2-100. It is then my responsibility to come up with my own system to select from their system. Well, I'll continue and see how it goes.

So, how much of that 31% return does the commission eat up? Well, it all depends on how high of a commission your broker has, and how much you are investing in each buy. But in short, it can eat up all of your money when you are constantly trading (as the STS system advocates). Additionally, unless you are trading in a tax advantaged account (IRA, 401K, etc), you are going to end up paying a portion of your earnings in taxes (the higher the return, the more in taxes you will pay). Based on the average return per trade, I calculated what the minimum amount one would have to invest in each trade to match the S&P 500 return (afterall, if you can't beat the S&P 500, you are better off just buying an index fund or ETF and then spending your time doing something else).

In a nutshell, if your discount broker charges you $7.50 per trade, then to just match the S&P500 return using the STS system, you would need to invest $2000 in every recommendation. If you factor in a 35% tax bracket for short term gains, then the minimum amount increases to $2150 per recommendation. (In order to get the 31% ROI, you would need to be investing at least $200,000 per trade). Since the maximum number of positions held at one time is 501, you would need $950,000 (or probably $700,000 in a margin account) to buy each of the recommendations. This is not something for the small time investor. Furthermore, making 1100+ trades a year does take time, and that is only to match the S&P 500.

So while the 31% (by my calculation - 36% by their's) ROI sounds good, it looks like those with $1 million will only be able to get 1/10 of that amount. But, even that isn't true. It all has to do with how the ROI is calculated. With the S&P 500, if I have $1 million to invest, buy it and hold it for 14 years, I will average 4% per year. In other words, at the end of 14 years, I would have $1.73 million. However, using the STS system, if I dedicated $1 million and bought $2000 of each reccomendation for 14 years, I would only have $1.035 million at the end of 14 years for an average annual return of 0.26% - less than 1/100 of the 31% nominal ROI. Why? Because with the S&P500, my money is fully invested the entire time, so all of the money is constantly growing. With the STS system, only a portion of my money is invested at any one time (although the entire amount is needed for the few times when 500 positions are open). I did an analysis and found that 75% of the time, less than 20% of the $1 million is actually invested.

Well, why not divide the extra amongst the stocks that are owned? That would increase commisions as portions of the stock would need to be sold to invest in new recommendations. What about investing the money in a money market? Well, most brokerage accounts do this, and those money markets have a return of 0.5-2%. Granted this would increase your overall ROI (of the entire $1 million) from 0.26% to 1.8% (assuming a 2% money market), but if your money market account is making more than the STS system, why not just invest in that. And therein lies the problem with almost every stock trading system. The ROI boasted about is based on hypothetical accounts and only considers the amount actually invested in the stock picks, they do not reflect how a real investment account would operate.

The question and answer section glosses over this issue indirectly. One question was whether a mutual fund could be set up. The answer given is no because the large sums of money ($50 million+) would cause to large of movements in individual stocks. I disagree. The reason it wouldn't work is because the mutual fund would hardly ever be fully invested. If you look at any mutual fund's holdings, a small portion (5% or less) is kept as cash to take advantage of new positions. When a stock is sold, something else is almost always bought immediately. The STS system doesn't work like this. The system may spit out 0 recommendations or 200 recommendations in a single day. Based on my review of their published recommendations, there would almost always be a significant (80-90%) cash reserve in the fund (which is needed to capitalize on the trade recommendations) that severely limits the earning potential. In other words, while the STS system has a 31% ROI in theory, if it were started as a mutual fund, that would plummet 2-3% or less because the funds in the account would largely remain uninvested.

Up to this point my analysis relied on the assumption that all recommendations were acted upon. The STS founder admits that this is not practical for most people, so let me test some of the statements that he makes such as choosing as many as 20 positions to approximate the return or that someone with as little as $10000 could profitably participate. Remember, stock systems get their money from selling the stock system not necessarily from actually trading with the stock system. So, it is in their best interest to make the system as "workable" for as many people as possible. If they started off by saying that you needed $1000000 to just match the S&P 500, then they wouldn't get many people buying.

Without a system (which would need to be analyzed separately) to select which of the STS recommendations to act on, I selected randomly. First, I picked every third, ninth, and eighteeth recommendation to determine how much difference the ROI would change. The nominal ROI per trade was 0.86%. For every third recommendation it was 0.83%, for every ninth recommendation it was 0.73%, and for every eighteenth recommendation it was 0.89%. Some below, some above, but no changes in an order of magnitude. Remember, that when I put the STS system into actual account conditions, the return I calculated was 1/100th of the return from the S&P500.

To test it for actual account conditions, I chose an account with $300,000 and a commission of $5 per trade.





Per Trade ROI





Trade Amount





Maximum # of Positions





Actual Annual ROI





Not so impressive compared to the S&P500. It does appear that the more money per trade, will increase the ROI. However, the total funds needed will increase as well. In fact, after going over 50+ scenarios using their recomendations I am of the opinion that there is no way to even beat the market over the long term with the STS system. Sure, you may be able to for one or two years, but throwing darts is just as effective as a method for choosing stocks. Bottom line is that the STS system requires too much money to be held in reserve (ergo not making money).

And frankly, that is the problem with almost every stock picking "system" out there that I have examined. 1) Too much cash is left on the table for the next stock that may come along. 2) The constant changing of positions severely desreases the return from commissions and taxes. That is why long term investing has remained tried and true for centuries.

Saturday, October 10, 2009

WalMart - Evil Incarnate! Or Maybe Just a Really Good Company - Part 5

Finally, the conclusion of my critique of the Wake-up Walmart website:

49. There are 76 class action lawsuits alleging wage-and-hour violations at Walmart. Well, this is sort of a disappointment, I mean after linking Walmart to terrorism you would think that they end with Walmart killing babies or something. If they did wrong things (again these are alleged violations), then I fully expect the courts to rule in favor of the plaintiffs.

50. Walmart's settlement is worth little to the workers and less to the company. OK, if the plaintiffs had such a strong case, why did they settle (there is nothing that forces them to settle as far as I know). Could it be that their case isn't as strong as they proclaim and wouldn't get anymore than the settlement amount anyway? I mean, if these are slam dunk cases, then let them go to trial. Next, if the settlement is worth little to the workers why did you bother to settle? To say that the settlement is only 14 hours of sales for Walmart as your proof that it is worth little to Walmart is rather misleading. Since after tax profit is what matters to the shareholders of the company, compare it to this. In which case, the settlement is equal to a half a month of profit. Half a month of profit is a big deal!

51. Walmart's Minnesota settlement is a raw deal for local workers. Walmart settles for $54 million. Actually, what should have been said is that the class of plaintiffs (or their lawyers) settled for $54 million. They weren't compelled to accept it. Sure Walmart may have been liable for $2 billion in the penalty, but the key word there is MAY. They also could have been liable for $0. Which means that the lawyers would have gotten zilch. Sorry, but even the class action lawyers follow Rule #1. At least this time they compared the $54 million to Walmart's profit (a little over a day and a half). Still, one should look at what was accepted $54 million versus the maximum of $2 billion and get a rough idea of how likely the lawyers thought they would get more was: 54 million/2 billion = 2.7%. Not good odds.

52. Walmart is still appealing $380 million in awards to workers in Pennsylvania and California. So now it is a bad thing to avail oneself of all legal recourse if you believe the judgment against you is wrong? Of course they are going to appeal, they have nothing to lose at this point. Appealing it all of the way to the Supreme Court will cost maybe another $1 million-$5 million dollars. If during those appeals the judgement is just cut by 10%, then Walmart that $1-5 million is money well spent. If nothing happens, $1-5 million is only about 1% more than before (and that $380 million has been reinvested in the company for the next 5-7 years while the process is going through the courts). That is how the civil justice system is designed. Every company worth half an once of wilted beans would do the same thing if a $380 million judgment was made against them. Nothing sinister here. Walmart is not going to roll over for you just because you don't like them. They abide by Rule #1.

53. Walmart's claim that it's a changed company is betrayed by very recent lawsuits. Walmart will always have lawsuits against it for the simple fact that A) it touches more peoples lives than most companies (both employees and consumers) and B) they make a ton of money.

That is the extent of the facts that WUW has to offer. Now, many of you may be wondering if I am a shill for Walmart. Let me say that Walmart did not pay me a dime for this critique. They never contacted me or had some 2nd party contact me. I have however made a lot of money from Walmart stock. So maybe that does make me a shill.

For any Walmart executive out there, if you would like to pay me obscene sums of money to scour the web and write critiques about those who criticize your company, make me an offer. I can be bought in most cases for the right amount. (Actually, that goes for any company).

Do I think Walmart is perfect? No, they have lots of problems. Not any more than the average multinational corporation that employees 2.1 million people and has sales of $400+ billion each year. However, the way to solve Walmart's problems is not to write websites that have innuendo of terrorist ties and other boogeymen. The way to change how Walmart operates is to become an owner. Anyone can do it. Buy stock. Attend the company meetings. Make your proposals and gather support of other shareholders for those proposals. One day, you may be voted onto the board of directors. Myself, I am content to make money off of them. I have other problems that I have to deal with that take my time, so I'll let Walmart continue with all of these "nefarious" practices.

WalMart - Evil Incarnate! Or Maybe Just a Really Good Company - Part 4

On again with the screed against those who are against Walmart! From the Wake-up Walmart website:

33. Walmart repeatedly broke child labor laws. Before we get into all the evils that Walmart is perpetrating against our children, lets get some other facts out in the open. Child labor in the US and child labor oversees are not the same thing. Oversees when people rail against child labor, they are usually talking about 5-12 year olds who are working their fingers to the bone. Here in America, they are talking about 14-18 year olds. Walmart doesn't employ 12 year olds in the US. In fact, the number of 14 and 15 year olds they employ is probably under 1000. That being said, they still broke child labor laws. Namely, every state (and some cities) have their own child labor laws which can be vastly different covering everything from the types of jobs they can do to the hours they can work. So yes, the country's largest employer of children (i.e. 16 and 17 year olds) occasionally violates laws of the hundreds of jurisdictions that it does business in. Guess what, other companies who hire children occasionally violate the law as well.

34. Walmart got a sweetheart deal as part of their settlement. Giving notice to employers when there is no criminal intent is not unheard of. Particularly when you are A) the biggest employer around and B) the largest payer of taxes. Sorry if we do not live in Utopia, but getting rid of Walmart will not bring on the 2nd Coming!

35. Walmart's own internal audit found extensive child labor violations. Minors working too late - if the law says not past 9:00 PM and you clock out at 9:01 PM, then your employer has violated the law. It is no surprise that their internal audit found violations, especially since the labor departments have found violations. Now, what would be shady is if the internal audit found NO violations. Once again, companies always have violations. What is really important is the severity of those violations. Were children (16 and 17 year olds) working 15 minutes more than they should or were they working 2 hours more than they should? Both are considered violations, and in many cases would be fined the same amount.

36. Walmart continued to break child labor laws. And drivers continue to break traffic laws. The fact is our country has become obsessed with having laws to cover everything. There is a report out there (I can't put my finger on it right now) that shows the average person (not criminal) commits three felonies a day. Now, I'm not sure that I believe that, but it does illustrate the point that it isn't very difficult to break a law. If you hire children, you are probably going to break a few child labor laws.

37. Walmart and undocumented immigrants. First, they are called illegal immigrants because they are in the country illegally. That is the US Government's responsibility. At one point in time there was an e-verify system where an employer could verify the work status of a worker. Not anymore. So, Walmart has been fined by the US Government (which continues to allow illegals into the country) for hiring another company which hired illegals. That is pretty hilarious to me, especially since various state, county and federal agencies have been found to have hired illegal immigrants.

38. Walmart is America's largest importer of port containers. Wahoo! Go capitalism!

39. A Walmart container arrives in the US at a rate of 1 every 45 seconds. Yeah!

40. Since 9/11, America's ports remain vulnerable by only inspecting about 5 to 6 percent of cargo containers coming into our ports. Uh-huh, are they trying to link Walmart to terrorists now?

41. Members of congress agree the risk to port security could lead to the "Nightmare Scenario." So could allowing the flow of illegals, drugs and guns across our borders, but it doesn't see like we're too worried about that.

42. Port security experts have outlined the threat of unscanned containers. Why do we need security experts to outline the danger of bringing in big boxes from all over the world?

43. Ignoring this threat, Walmart lobbies members of congress to resist tightening port security. Actually, it is the RILA, of which most retailing organizations are a part of. What they understand is that there is a finite amount of resources at any given time. While inspecting every container may have "insignificant costs" per item or per container, the total aggregate of those costs adds up to billions of dollars. Hypothetically, if you knew that someone was going to break into your house and steal $1000 worth of stuff, how much would you be willing to pay to prevent it? What if it was $10,000 or $100,000? The whole point of lobbies is to look out for the best interests of their constituants. They provide a valuable service by providing information (good and bad) to the members of government. It is members of government's job to sort through the information and decide what is best for the country and how to use the resources that government has. So far, congress has not decided that port security is important enough to divert resources from rain forest museums and snail mating practices research. That is congress's problem, not Walmart's or the RILA.

44. Walmart uses RILA as an anti-security lobbying organization. No, Walmart uses RILA to lobby for their interest. Their interest is to make money for their shareholders. That is the sum total of all security, child labor, Chinese products, safety, etc, etc decisions. One could argue that the Berlin Wall made East Germany very secure.

45. Walmart and RILA: Putting profits before security. Rule #1 says this is true. However since security is a part of profits as both a real and potential expense, the statement is meaningless.

46. Port security experts dispute the potential cost to Walmart. When faced with the cost impact, I am going to have to trust Walmart here. Why? Because they actually have to pay for these costs, the port security experts do not. Supposedly it will only raise the price by .2%. In the retail market, profit margins of 1-4% are not unheard of. 0.2% price increase equates to a profit decrease of 5-20%. Shareholders don't like that.

47. Walmart uses money and influence to pressure politicians to oppose strengthening port security. Every organization does. Because only individuals can vote. Walmart doesn't elect politicians. People do. In the end, a politician that wants to get re-elected has to please his constituents (voters). If his voters don't care about port security, then neither does he.

48. Walmart uses lobbyists who have close ties to the Department of Homeland Security. All big business uses lobbyists with ties to the government. That is the only influence they have and it helps to have someone who A) knows Washington and B) knows the people who are going to make decisions that affect your business.

Tuesday, October 6, 2009

WalMart - Evil Incarnate! Or Maybe Just a Really Good Company - Part 3

Part 1 and Part 2 began my rebuttal of the "facts" that the Wake-Up Walmart (WUW) website presents. I continue:

24. Walmart cares little for the safety of its workers. The cites given start to bring out an important point. Walmart (or any corporation or organization for that matter) is not a living breathing entity. It is a piece of paper that allows a group of people to work together and be taxed as a separate entity. So, Walmart doesn't care. Period. Now, if we want to talk about people caring, that is a different story. Two of the cites given are about the doors being locked (at night) or emergency exits blocked. These are at a minimum fire code violations. However, if the standard for caring about safety is a single (or multiple) fire code violations, then few large companies care about worker safety. Why would managers lock workers inside at night. Well, 1) they have a job to do and the manager may have had trouble with people taking breaks when they weren't supposed to. 2) That Walmart happens to have a large amount of inventory (read money) in the story and may have had problems with thiefs coming in at night. 3) The manager may have been boneheaded. If you want to convince a reasonable person that Walmart doesn't care about their workers, then show that they have a significantly higher number of "unsafe" practices than a comparable retailer. Their third cite tries to do that by pointing out that they are in an "adverse risk" pool for workmen's comp in WV. Being in an adverse risk pool means that employees have high accident rates. This could be caused by 1) Walmart not caring, 2) Low skilled employees doing stupid things or 3) Employees lying about their accidents (I know, its hard to believe that anyone would lie to get money). Frankly, Walmart not caring is the least likely since being in an adverse risk category means their insurance rates go up (and that negatively affects Rule #1 - see, safety is all about money).

25. Walmart takes a combative approach to workers' compensation claims. And most businesses do. Somebody has to be the most aggressive, and in this case it is Walmart. Perhaps the type of people that Walmart hires (because of their low skill level) has a disproportionate number of loafs, cheaters, and hooligans. Notice I didn't say the majority of them are, just a disproportionate number in comparison to the entire population. If you did a study, I bet you would find that the higher someone is paid (i.e. the more skills they have) the less likelyhood of claiming workmen's comp for jobsite injuries. Why? Because workmen's comp doesn't replace all of one's income, and there is no possibility for bonuses/pay increases on workman's comp. So, for low wage workers, workman's comp is a pretty good deal - 50-80% of the pay for 0% of the work. And if your caught, since the actual money amounts aren't much, you'll probably just get a slap on the wrist. Besides, more workmen's comp claims mean insurance rates go up (or in the case of self insured - more money out of the pot), which negatively affects Rule #1.

26. Walmart gives its managers and other non-hourly associates a disproportionate amount of its profit sharing, stock incentives, and other benefits. Yeah, as does every other company that has these programs. First, 401K, stock incentives, and profit sharing programs are usually based on how much an employee is willing to contribute and/or their position in the company. Since we have already established that most Walmart associates are making "poverty" level wages for a family of 4, do we really expect them to sock away some money in a 401K or profit sharing plan? Certainly not when that new LCD TV at Walmart is on sale for $600! (And don't try to tell me that "poor" people can't afford $600 TVs). The fact is salaried people are usually working full time. Plus, they more than likely have a higher wage (hence more "extra" money to contribute) and they are more likely in positions of responsibility (hence a higher payout rate of incentives).

27. What Walmart gave to hourly associates pales in comparison to what Walmart gave to its top five executives. The lesson learned then is if you want to be paid millions of dollars, work your butt off and become the CEO. They aren't going to give you the position just because you think you deserve it, but you also won't be breaking new ground. Many CEOs started at the bottom and worked their way up. If you want to just be a greedy jealous person, continue on with your life the way it is.

28. Walmart's statement on profit sharing highlights Walmart's low pay. Does anyone thing that they are going to get rich being an hourly associate at Walmart? How about K-Mart? Or McDonald's? You aren't even going to get rich working for the socially conscious Ben & Jerry's! 2% being contributed to both profit sharing and 401K is probably about average for a company. That is about what the company I work for contributes. In fact, that is about what the last three companies that I worked for contributed.

29. The average profit sharing/401K contribution for all Walmart employees was $517 dollars per worker in 2007. The cites talk about how little hourly associates make (which is fair since their work is low skilled and in high supply), and breaks it down to as little as $1.42 per day for retirement. If Walmart matches just 50% (since they are so cheap elsewhere, why expect more?), then that means the workers are also contributing $2.84 a day to their retirement. Doesn't sound like much, right? WRONG!!! The beauty of compound interest is that a little amount becomes humongous! An hourly associate who started working at Walmart at age 18 and kept working in the same position, never getting a single raise, but contributing $2.84/day with Walmart adding $1.42/per day would have more than $800,000 if the market grew at only 8% per year (which historically it has, even with all of the recessions and depressions). He or she would then be able to convert this to tax free municipal bonds at 3%, and take out $36000 of the balance each year to live on, and be able to live until age 100. So in retirement they would have twice as much income as while working, and that isn't even counting Social Security. I take back what I said before about an hourly associate at Walmart not being able to get rich.

30. Walmart closes down stores and departments that unionize. Walmart closed a store in Quebec after they unionized. Of course, the store might not have been profitable before. Or Walmart might not have wanted to run a unionized store. Guess what? That is OK. Some businesses have found ways to work with the unions and still operate a profitable business. Some have not. Some don't want to try. Just like the government says you have the right to unionize, Walmart has the right to close down stores. Even if the Labour Board of Quebec fines them. As for the unionization of a small meatcutting department causing Walmart to phase out its in store meatcutting company wide, I would guess it is more coincidence. Meatcutting is a service oriented business (because the meat is the same price whether it is whole or cut at most stores I have gone to). Some stores provide better service and try to sell themselves on that (and may have higher prices to compensate). Frankly, if you are trying to be the low price leader (which Walmart is), then there isn't much room for extra service. No one has accused Walmart of great service. Besides, are we really to believe that the unionization of 5-10 workers in Podunkville, TX caused the corporate big wigs to have an emergency meeting in Bentonville, AR and decide to cut out meatcutting all across the country? Isn't it more likely that data from 6-12 months of operations with and without meatcutting was looked at and found that meatcutting wasn't helping the bottom line (and when your profit margin is only 3-4% you need all the help you can get)? The Texas unionization might have sped up of the process (so there weren't more grievances to deal with from more unionized labor).

31. Walmart has issued "A Manager's Toolbox to Remaining Union Free." Yep, let's be open about it. Walmart doesn't want to pay the increased costs of dealing with a unionized workforce. That is their perogative. They are fully within the law to try to forgo unionization.

32. Walmart is committed to an anti-union policy. Cites from all sorts of unfair labor practices. Heck, Walmart has 1.4 million employees in the US. For comparison sake, why not show how they are so much worse than other similar non-unionized retailers rather than just trying to scare me with "100 charges" or "60 complaints." Oh yeah, and lets be sure to compare actual violations not just charges or complaints. Why not do that if the "evidence" is so damning? Maybe because it is not. As before, many companies (most in the US) don't want to deal with unions. Unions haven't exactly been the choirboys in labor/management relations in the past (and present).

Monday, October 5, 2009

WalMart - Evil Incarnate! Or Maybe Just a Really Good Company - Part 2

In part 1, I started my completely unresearched rebuttal of Wake-Up Walmart's (WUW) website. Let me emphasize that I spent no time actually reasearching any of the claims they made (so they may be wrong), all I am doing is applying logic and reasoning to the statements they make to support their cause. So I'll continue on in the Community Impact section:

14. Walmart drives down wages and increases poverty in communities. To begin, they cite some statistics of retail, general merchandising, and grocery wages going down by as much as 10% in counties that built Walmart's. Well, to understand this we would need more information. If you read part 1, then you know that I have no problem with Walmart paying 16% less than the average of other retailers. I will state that it makes perfect sense (using supply and demand) for the wages to go down. Workers are subject to supply and demand just like products are. And the two can move in opposite directions (if lots of people demand Walmart products, the pressure is for upward price if supply remains constant, if lots of people want to work at Walmart, the demand for higher wages goes down since there is someone else who will do the job cheaper). Let's say your county only has a couple of big box stores and 500 people employed in the retail/general merchandise field. If Walmart comes in, and builds a new store with 300 employees, then there has been a net increase in the number of low skill jobs, but a decrease in the number of available people for those jobs (unless Walmart displaces 300 or more of the existing jobs). The previous positions were already filled with the most highly skilled of the available low skilled labor force, so Walmart (offering lower wages) is forced to higher even lower skilled workers. Therefore, the overall average skillset of the employed labor force goes down. More people may be employed, but it includes more of the bottom rungs than before. This provides downward pressure on wages. This is still a good thing because more people are employed and the county probably has a net economic benefit from more people being employed.
The other fact that they mention is that counties with the most Walmarts experienced greater increases in family-poverty rates. Well, that doesn't mean they are cause and effect. It could be that Walmart purposely targets new stores to middle and lower class areas exactly because that is who their customers are, I just can't see them opening a store on 5th Avenue.

15. Money spent at Walmart does not stay in the community. I was rather surprised that it took them so long to get back to the Mom and Pop argument. Their argument is that in Virginia 60 percent of money spent downtown, stays downtown, whereas just 6 percent of money at big box stores (glad it's not all Walmart's fault this time) stays in the community. I don't know about you but the types of businesses that you can spend money on downtown are not the types of businesses that Walmart competes with. The businesses in my city's downtown area are bars, corner cafe's, bail bonds, attorneys, accountants, etc. So let's look at a hypothetical of Mom & Pop retailers and see how much money stays "in the community." First, right off of the bat, Mom and Pop need to procure their merchandise from somewhere, unless they make it themselves (highly unlikely since they are running their store). That could be anywhere between 40 and 80% (40% if it is just raw materials that are going to be finished, 80% if it is complete products that are just going to be marked up) off the top that is going to somewhere besides the community. Then there is the tax man to pay, which is probably going to take 20-50% depending on where they are located, the local government would be taking the least portion of this. We have utilities (electricity, gas, water) which most likely is being produced outside the community, say 5%. And any host of a number of other expenses that are spent outside of "the community." What you find is that 5-10% of the money that is spent at a Mom & Pop store actually stays in the community. Why? What some people fail to realize is that we no longer live in an era of self-sufficient cities. That era died with the invention of the railroad (or ocean going freight) about 200 years ago.

16. Walmart negatively impacts the environment, traffic, and sprawl. And to support this they prove that Walmart has violated the Clean Water Act. No mention of how Walmart has "forced" suppliers to use less packaging (which has significantly decreased the amount of waste going to landfills). Yes, they violated the Clean Water Act, and if you actually read the government regulations you would find that it is relatively easy to violate most all of them. Have you ever wondered why you have to put up with ridiculous rules at work like not putting light bulbs in the trash? It is because it would be a violation of some regulation that private citizens in their own home are exempt from. I asked the company I worked for if they could pay me to take their "hazardous waste" (lightbulbs, batteries, etc) and dump it in my trash at home (which is perfectly legal). Unfortunately, they didn't go for it (it would probably violate some regulation). Also San Fransisco found increased costs of $256 million for road repair and "environmental degradation." I would say that number is dubios at best. I wonder what the cost impact of having the Grand Canyon or Yellowstone is due to the road repair and environmental degradation caused by the increased number of people who flock to those areas?

17. Walmart forced small businesses to close. Studies in Iowa show some towns lost 47% of their retail trade after 10 years of a Walmart store being built nearby. Once again, one would have to look at the overall health of the business in general. With reports that 80% of small businesses don't last five years (for various reasons), only losing 47% doesn't sound so bad. Besides, why are small town Mom & Pop stores better than Walmart? Walmart offers more choices and cheaper prices, plus I can do my grocery shopping and pick up an exercise ball all while shopping for clothes. Plus, many Mom & Pop's don't take credit cards (because they cost money to accept) and only take local checks. In this case, Walmart is cheaper and more convenient for me to use while traveling (plus the increased revenue contributes to the dividends they pay me!) Small businesses closed because it was no longer profitable to compete with Walmart. We don't live on the playground, Rule #1 says that if we make money we stay in business. If we don't make money we change something or get out of business. Some small businesses have actually thrived by going after niche markets. Walmart does a horrible job at niche markets, but then again, they aren't trying to get the niche markets. If you like cheap clothes made in China that will last 2-5 years before falling apart, shop at Walmart. If the extra quality and clean conscience of buying from Mom & Pop for 2 to 3 times as much appeals to you, then go for it. Based on the market, most people agree with me. Smile!

18. Walmart doesn't care what your community thinks. With a quote, lacking context, from Walmart real estate manager saying that they wouldn't build anywhere if residents didn't want it. For some reason, I believe that if taken in context you would find that he was talking about residents directly around the proposed building. In which case, you could probably say that about any business. Unfortunately, you can't have everything. If Walmart (or any other business) only built out in the middle of nowhere than the cry of "environmental degradation" as in San Fransisco above would be even greater. Walmart isn't going to build anywhere that they can't make money, that would violate Rule #1.

19. Walmart and imports. Basically, Walmart is bad because 70% of their non-grocery merchandise comes from China. If this really is that important to you, start living your meager existence with your own sheep and cotton fields. Nearly everything low cost product is made in India, China, or Bangledesh because those three countries constitute more than half of the world's population and for the vast majority low wage (compared to America), manual labor is a far cry better than living on the streets or working in the fields or coal mines for 12 hours a day. Oh, yeah, and they fail to track where their products that they buy from non-Chinese companies are manufactured. Except that Walmart doesn't try to pretend that its products are manufactured in America, so why track it. If your company professes to be 100% made in the USA, then you better have some program in place to track where your products were made. Walmart has no need to. Besides, I support providing jobs for the third world. It wasn't too many decades ago that all of the cheap stuff was made in Japan, Korea, Hong Kong and Taiwan. Now those countries have graduated on as their workforce has increased its quality and skill level. Why do people not support economic improvement for people actually in poverty (as opposed to the US version "poverty in name only")?

20. Walmart buys most of its merchandise from China. And this is a bad thing? WUW has all sorts of statistics (entirely true) which are presented to make the reader believe that the world is coming to an end because of the amount of stuff we buy from China.

21. Many of Walmart's "American Suppliers" actually manufacture most or all of their products in China. Once again, SO WHAT? Their products are manufactured in China because it is cheaper to pay Chinese kids $5 a day (which is better than the $0 a day they were getting working in the rice paddies for 12 hours) to produce products which are designed to be sold for $2-3. Is everything about China evil?! Because we don't like their government, we should avoid doing business with the country? How does that help their government change?

22. Walmart's Chinese factory workers are treated poorly. First, let's get something out in the open. Walmart doesn't have factories in China (or if they do, it is only a few). Walmart is in the business of selling stuff, not making stuff. All of those "Walmart" Chinese factories are actually their own independent companies, in many cases run by enterprising entrepreneurs (who are Chinese). Walmart only has as much sway as they do business with those companies. If Walmart has a significant share of one's business, then they can make a lot of changes. If not, they can't. I may spend thousands of dollars a year at Walmart, but if I went in and said I wanted change, the manager would laugh at me (maybe not out loud, but he would certainly be in his head and I would be the talk of the water cooler for a day). So any violations by a company are that company's responsibility (and China likes to lop people's heads off for screwing up). Chinese factory workers are treated much better than the other options they have. It may not be ideal, but that is part of living in a growing economy.

23. Workers face appalling work conditions, despite Walmart's factory inspection program. No proof is given of the working conditions, just a statement that only 26% of inspections are unannounced. This is something that I have a bit of expertise in. Auditing operations. Announced and unnanounced audits/inspections have their advantages and disadvantages. I have done both. I happen to believe that an effective auditing program has to use both. So, I have no problem with Walmart "only" doing 26% unnannounced. Besides, every company (including the great Mom & Pop's) coaches their workers if they know an audit/inspection is happening. It isn't just a Chinese thing. It is a good business practice. Besides, any competent auditor/inspector knows the workers have been coached and still knows how to get the information that they want. If Walmart has incompetent inspectors, then say that with the evidence to back it up. As to hiding violations, well, WUW doesn't directly say they are, they just insinuate that it is happening.

Sunday, October 4, 2009

WalMart - Evil Incarnate! Or Maybe Just a Really Good Company - Part 1

Walmart has been the whipping boy for a while now. I'll admit, I had never been in a Walmart until I was 15. I now do the majority (by total dollars) of my shopping at Walmart and own stock in the company. So I am hardly an unbiased defender of the Great Smiley Face. But I'll do it anyway. When I lived in New York, there was a town near where we lived that was possibly going to get a Walmart. The people were divided and post smiley faces or frowny faces on their lawn based on how they stood on the issue. Recently, I ran across the Wake-Up Walmart (WUW)website. They have a page of "facts" that I would like to present with my refutation.

1. A Substantial Number of Wal-Mart Associates earn below the federal poverty line - This could be said of any retailer. The retail business requires a large amount of unskilled labor. Someone can be taught how to stock shelves, sweep floors, operate a cash register in about an hour. More over, just about anyone can be taught these skills. To support this statement, WUW cites that the average pay of an associate is $19K per year which is $2K below the poverty line for a family of 4. Well, OK, except that they don't say that the average Walmart associate is supporting a family of 4. Since I frequent Walmart, I have spoken with many associates there. If my Walmart is indicative of others, then probably 80-90% of Walmart associates are made up of the following types of people: high school students, college students (usually single or married with both working), mothers with kids in school (husband works so Walmart is 2nd income), retired or near retired persons (hardly supporting a family of 4 and usually with other income from SS or pensions). Are there thousands of Walmart associates who are supporting families of 4? Probably, but this is more a result of the magnitude of numbers. Walmart employees more than 2 million people. If only 1 percent are supporting a family of 4 than that is 20,000. It is still the exception. WUW also says that the CEO makes 1551 times what the average associate makes. So? There are 2 million associates and 1 CEO, maybe they should be paying him more. This type of argument exists solely for the jealous and greedy who believe they are in someway entitled to a larger portion of other people's possessions and earnings. If you are one of these. You're not entitled. You're just a greedy jealous person.

2. Walmart Associates don't earn enough to support a family. OK, this is completely up to interpretation. I supported a family on less than $20,000. Sure, you don't get all the bells and whistles in life on that amount, but it is certainly doable. WUW cites that the average family budget is $39K while the average associate makes only $19K. I say, if you are in this situation cut out some of your expense, and have the other spouse go to work. Maybe Walmart Associates who are supporting families of 4 should quit trying to live like Boeing engineers who are supporting families of 4. Walmart does not, and never has marketed the average associate as being able to support a family of 4. This is an Associate's problem, not Walmart's.

3. Walmart wages are not designed to support a family. Guess what, they don't and Walmart fully admits it! What's even funnier is they cite Walmart as saying that 2/3 of associates are not trying to support a family (i.e. not primary breadwinner). So, if Walmart says their wages are not designed to support a family, and people are not forced to work for Walmart, why are people complaining about exactly what they knew before getting into the situation?

4. Walmart can afford wage increases. Yeah, and they could "afford" to buy a nuclear submarine. That has nothing to do with it. WUW shows by some irrelevant math that if prices only went up 0.5% then everyone could get an $1800 raise. First, based on what is above, why stop at 0.5%. If the goal is to raise the average wage to support an average family, then why not increase prices by 6%? That would at least keep the page consistent. But then, people start to get funny about increases of more than 1%. Case in point, see the uproar of the public about increases in the sales tax. Wages are not set by the cost of products. Wages are set by what the market demands. If Walmart needs 100 workers and there are 5000 workers willing to work for $8/hour, why should Walmart raise wages? The fact is, the skill set needed to work at Walmart is very low and generally held by everyone in the population, hence, there is no demand to drive wages up.

5. Walmart wages are lower than other retail wages. This may be true. However, just because competitors offer to pay more is no reason for Walmart to. Wages are based on supply on demand. If Walmart has 100 positions at $8 per hour and competitor X has 100 positions at $10 per hour and there are 200 potential workers, then competitor X will probably get the most talented and motivated of the 200, and Walmart will get the leftovers. That is how a free market is suppost to work. WUW cites one stat that Walmart associates make 16% less than the average retail employee. Yeah, so what. A significant portion of retail employees make less than the average, a significant portion make more than the average. When Walmart opens a new store, I have never heard of them having trouble finding employees. Just because you think you should make more money doesn't mean you should.

6. Walmart's health care plan fails to cover 700,000 employees. Maybe because 700,000 of their employees don't work enough hours to qualify for it or choose not to participate (for any number of valid reasons). The fact that 700,000 employees are not covered by Walmart's plan in no way means 700,000 are not covered by health insurance.

7. Walmart's health care plan is too costly. This is completely subjective. WUW cites a some worst case statistics of what an employee would have to pay in costs even with the health plan. The fact is, whether you make $19K a year or $500K a year, going to the doctor costs the same amount. Most companies actually do subsidize their lower paid workers (through charging higher premiums to higher paid workers) even though study after study have shown that lower paid workers are more likely to make lifestyle choices (alcohol and tobacco use) which increase their health care costs. Frankly, I would say, if you are young and healthy, don't get health insurance and pay as you go. Even looking at my family situation right now, if we knew we weren't having any more children, then buying health insurance (besides catestrophic) would be a waste. Health insurance costs money (and roughly the same amount) regardless of how much money one makes.

8. Walmart's health insurance falls far short of the industry average. And then WUW makes the bait and switch. After talking about the retail industry, they now start talking about large firms (more than 1000 workers). So we go from comparing Walmart with other low skill, primarily part time, retail companies, to companies including Boeing and Ford whose workers are highly skilled, almost exclusively full time, and in most cases a significant portion are unionized. Why would they do this? Oh yeah, because if they kept with the retail comparison, Walmart looks like roses. Walmart covers a larger percentage of their employees than most all other retailers. This is one of the reasons Walmart decided to get behind the Universal Health Care plans in Congress. Because it would cause a larger increase in costs to their competitors. Hey, if you are going to get screwed, make sure your competitors are getting screwed more.

9. Walmart forces employees to rely on public assistance to cover health care costs. No, Walmart doesn't force anyone to do anything. Walmart doesn't have the power to force people. The government has the power to force people. Criminals (temporarily) can force you to do something. Walmart can ask, encourage, or cajole people into doing things. They do say that in 21 of 23 states "Walmart forces more employees to rely on taxpayer funded health care than any other employer." That is probably true as well (except for the "forcing" part). What is also true is that in all 23 of those states, Walmart is the largest employer of low-skill (hence low wage), part time employees by a large margin. So from a strickly absolute numbers point Walmart is the "most" in all sorts of areas (Walmart employs more red heads than any other retailer - true, but it has absolutely nothing to do with anything).

10. Walmart admits public assistance is a better value. And from the mouth of Walmart CEO himself. I agree with this statement completely, if it is qualified as being for the individual. Gosh, isn't it great when you have a leviathan government that can arbitrarily set prices (because the actual costs are subsidized with taxpayer dollars). Is it any surprise that when said government "competes" with a publicly held corporation (such as in providing health insurance), the cost to the individual is less using the government option? Why not just let the government provide everything then?

11. Your tax dollars pay for Walmart's greed. Actually it is those who believe Walmart has ill gotten gains that are greedy, but I digress. Supposedly, $2.5 billion in public assistance programs are because of Walmarts low wages and such. Good thing Walmart pays $7 billion in income taxes. I guess the government is still $4.5 billion ahead. So let's pretend that Walmart ceased to exist tomorrow. The government would lose $7 billion a year and public assistance programs would now be supporting an additional 1.4 million workers (I know, that is an exaggeration and completely not realistic, but if it is good for the goose ...). Much better situation.

12. Your local Walmart costs your community up to $420,000 per year. Uh-huh. (This is a re-hash of #11, just on the community level).

13. Your tax dollars subsidize Walmart's growth. Well, my tax dollars subsidize pretty much all businesses in the form of tax subsidies. WUW says that Walmart has received up to $1.2 billion in tax subsidies. That's great, care to say how many billions in sales tax, income tax, wage taxes, and other taxes are generated each year by Walmart (hint: it is many multiples of $1.2 billion). Most new businesses request tax subsidies when they move into an area. The larger the business (like Walmart), the more they ask for and get. This is because of the increased economic activity more than offsets any subsidy the locality approves. Oh yeah, and they used a "loophole" to get out of paying some taxes. Frankly there is no such thing as a loophole. Every entities' goal (from business on down to individual) is to legally minimize the amount of taxes paid to the government. When you deal with tax codes from hundreds of jurisdictions, there are bound to be "loopholes." The question should be, while they avoided $2.3 billion, could they have avoided $2.5 billion? If so, then their accountants need to be fired. BTW, I avoided thousands of dollars in taxes the last few years by using one of those nefarious "loopholes." Its called the Child Tax Credit! I keep having children (OK, so my wife actually does), and my taxes keep getting lower!

The Land of Outrageous Profits! - Part 2

Walmart is a different story. Where oil companies that are involved in exploration, production and refining can move some operations around (i.e. only explore and produce in certain regions of the world, refine in others), retailers have to do business in the country they sell stuff in. Looking at Walmart's numbers $255 billion of revenue is US producing $18.5 billion in earnings (7.2%), while their overseas operations have $98.6 billion in revenue and $4.9 billion in earnings (5%); or operations in the US are almost 50% more profitable than overseas. This may be partly due to the newness of the overseas markets, but if you delved into the numbers I think you would find that the majority is due to the US having the largest population of middle class with income to spend at Walmart. Furthermore, as long as market saturation hasn't occurred (yet another discussion), Walmart would be wise to continue expansion on the more profitable US market.

The bottom line is that the DOW stocks had earnings of $373 billion in 2008 and paid 31% of that in income taxes. So, that $373 billion for the companies to "give back" to the people is now $257 billion. It turns out that $111 billion is "given back" in the form of dividends. Of course these are the wrong people receiving the money according to some. Dividends go to shareholders. Not only that, within a class of stock, shareholders all get the same amount. So Sam Walton's heirs get paid the exact same amount as I do. They just own a larger percent of the company than I do. And the shareholders do deserve that $111 billion. In many cases that is the reason they bought the stock. Remember Rule #1! The business is in it to make money. Turns out, the investor is in it to make money as well. When investors buy stock, all of their money is at risk. If Walmart went bankrupt, I would lose all of my money invested in it. There is no protection. As such, investors expect to get a return, either in the form of increased stock value or dividends (or both).

So, governments got 31% of the earnings of the DOW, investors got 30% of the earnings, that leaves 39% of earnings to figure out where they are and if the providing higher wages or health care would have been better. There are three major categories that this money can be spent on. First, operations. Paying off loans on equipment and buying more inventory. Both of these can be good things. Paying off loans can reduce the financing expense which will increase profits later. Increasing inventory in a growing business is important to stay ahead of orders (having more orders than one can fill is a bad thing, because customers don't like having to wait to get what they ordered). Second, investing. This can be capital expenditures (new equipment) or investments (stocks, bonds, real estate, etc.). Both of these are good things too. Capital expenditures are used to increase productivity and generate more earnings (plus, that equipment is bought from another company which affects their bottom line). Investments provide capital to other companies such that they can spend it on one of the three categories. Third, financing activities. Dividends actually fall into this category. As does buying stock. All of the stock that a company gives to its employees has to be bought from the market (so, yes, many companies own a portion of themselves). A company cannot just snap its fingers and make new shares of stock. It has to tell the market it is going to make new stock and how much (which usually results in a decrease in the current price of the stock such that the market capitalization remains roughly constant. Additionally, if a company doesn't have earnings or left over money from previous years, then it can borrow money. Borrowing can be a good thing as long as the return on that money exceeds the finance costs.

So, in a nutshell, the left over earnings are used to expand the company (i.e. generate more earnings the next year). This is exactly in line with Rule #1. A company does not exist to provide jobs or health insurance. They exist to make money. If it is necessary to provide jobs or health insurance in order to make money, then the company will do it.

So what would be wrong with raising wages or providing more health care with the extra earnings? Well, to begin with, you would need to take that money from one of the other two uses: dividends to shareholders or re-investing in the company. Let's look at these two options.

Let's use Walmart as an example. Walmart had after tax income of $13.4 billion. Roughly $3.75 billion was paid out in dividends and $10 billion was reinvested in the company. Walmart has 2.1 million employees. We could probably assume that 2 million of these are the stockboys, cashiers, etc, that are usually championed as the poor who Walmart is walking all over. $13.4 billion divided evenly among these 2 million would be $6700 more for wages or benefits (which includes the necessary taxes that have to be paid - sorry you can't short change Uncle Sam). Since Walmart is usually chastised since it doesn't pay a wage that will support a family of 4 (that the positions it has were never intended to support a family of 4 is irrelevant), lets look at what benefit an employee would get.

For a moment let us pretend that Walmart is going to give everyone a $3000 raise and provide health insurance for the other 50%. Assuming that all 50% are providing for a family of 4. Health insurance from employers for a family costs on average $13000 a year. There is only $3700 per person left over after the raise so, the employee would have to pay $9300 - $5000 more than the raise that Walmart gave them! Even if the employee is single, the cost is $7200, requiring him to fork out $3500 almost as much as his raise. If you are relatively healthy and you got to choose whether you had health insurance (which you may not use) or $3500, which would you choose? I actually had the opportunity to make this choice. I chose the cash.

In the end, whether the employees would "benefit" from having these profits is meaningless. They have no claim on them. Employees have essentially made a contract with the company for X wages and Y benefits in exchange for Z work. Regardless of how profitable (or unprofitable) a company is, all that is owed employees is X +Y as long as they provide Z. The investors on the other hand, have complete claim on the earnings of the company. They own those earnings. The shareholders elect the board of directors which ultimately decide how that money is reinvested. So, if you are an employee and believe you are being unjustly treated you have a couple of options:
1) Quit. Why are you working for a company that treats you like garbage? (Oh, maybe they really don't your just jealous and greedy and want something that you don't deserve).
2) Buy stock. Now you own the company. At the next meeting, put forward a proposal to distribute earnings to the employees rather than the shareholders. I'm sure that will be well received.
3) Continue to whine. This is usually the option that is chosen.

The Land of Outrageous Profits! - Part 1

Welcome to America! The Land of Outrageous Profits! Our companies are so rich that people have time to complain about how rich they are. Michael Moore, after making millions through the quasi capitalist system, has made a recent movie about how horrible capitalism is. Protesters at the G-20 conference complain about the horrible things a capitalism has done. And my personal favorite is when people complain about the evils of WalMart or Exxon or any other Big Bad Company. The reason it is my favorite is because most of what they say is wrong, meaningless, or both. And they don't even have a clue that they are wrong, meaningless, or both.

So, to begin let me give some disclosure about myself. I have never taken an economics class in my life, neither high school nor college. I have not read an economics textbook, ever. The same with Finance. In fact the only business classes that I had was a Management for Non-Business majors in college. So who am I to talk about business, finance, and investing? Well, I started seriously learning about investing in 4th grade and have closely followed the US stock markets since then. Pictures of myself in my early years show that I understood money was important as early as 2 years old. My parents can testify that I started analyzing complex money issues (with my allowance) and was much better at saving during my teen years than my bothers. In high school, I started to learn and follow the commodity markets.

In college I started investing the money I had. Since that time I have invested in a variety of things. I have made money investing in stocks, bonds, and real estate. I have also owned and operated an S corporation with some college friends. Each of my investing endeavors has contributed to my education about money and finances. Do I consider myself an expert? Not by a long shot, but I feel confident in explaining the basics.

Before I get too far, let's go over Rule #1 of business: The primary goal of all businesses is to make money for the owners. This rule is what distinguishes businesses from charities. While all businesses play a political/social game of saying that safety or the customer or employees or something else is most important, they are not. All of these other factors are weighed against making money. For instance, safety may be important. If a company has a dangerous job to do, it has several options:
1) Allow the company to do the job without mitigation of the danger.
2) Provide extra safety equipment or training to the employee.
3) Compensate the employee at a higher rate for taking the risk.
4) Decide not to do the job.
In each case, the company has weighed the cost of injury (medical, bad publicity, wages, etc.) to the benefit of the job being completed (increased efficiency, prestige, etc.). For businesses, all decisions are financial. Some people aren't comfortable with that concept. (Even the most "socially conscious" businesses make their decisions based on money.) Now that we have Rule #1 out of the way, let's get on with it.

First, let's look at how big some of these companies are, after all, we are told that Big "Insert BoogeyMan Here" are the cause of our problems. I'll use the Dow Jones Industrial Index as an example. Thirty large cap stocks make up this index. While the overall diversity is lacking (it has improved in the last decade), the index has been a very close approximation of the market as a whole (the market being made up of 5000+ publically traded stocks).

Three ways of looking at the size of company give different results. First, revenue. This is the total amount of sales of goods and services that a company has. The top five in the DOW are Exxon ($477 billion - a perennial favorite bad guy), Walmart ($405 billion -another favorite), Chevron ($273 billion - part of the Big Oil Cartel), GE ($182 billion - usually you don't hear too much bad about them because everyone thinks they are an manufacturing company - actually, almost half of their business is in the financial services sector), and finally Bank of America ($124 billion - does anyone not think this company is the embodiment of Satan by now). So clearly, those companies who bring in a lot of money are evil, evil, EVIL!!!!

Oh, wait, I am suppose to be for capitalism. So, let me say, none of these companies are evil. In an effort of full disclosure, I own a large amount of Walmart stock. I also own all five of these companies through various retirement funds and ETFs. The major reason why these five large companies bring in so much money (notice I said bring in, not make) is because they sell products or services that millions use. Oil and gas are the fuel of our economy. Walmart is the middle & low class shopping haven, GE has their hands in so many things you can't not buy GE products, and we all like to keep our money safe in a bank.

Second, market capitalization. This is the value of the stock that has been issued. The top five are: Exxon ($319 billion), Microsoft ($222 billion), Walmart ($189 billion), Proctor & Gamble ($165 billion), and JP Morgan Chase ($164 billion). Two are the same but three are different although all have been villified to some degree or another. Another way of describing market capitalization is the perceived value of the company by investors. This perceived value includes the sum of assets and liabilities, as well as the future earnings potential based on past experience, market conditions, and personnel the company has. Market capitalization is the most fluid of the three valuation types because it flucuates whenever the stock is being traded.

Third, earnings. This is the actual money that is earned (and thereby taxed) by the company. The top five are: Exxon ($82 billion), Chevron ($43 billion), Walmart ($21 billion), AT&T ($20 billion), Microsoft ($20 billion). A lot of the same characters, now we have AT&T (communications giant). Earnings are a sign of how companies have used resources, labor, technology, and capital to accomplish Rule #1.

All of these lists are in absolute numbers. The 30 DOW stocks combined had a market capitalization of $3.2 trillion, revenue of $2.8 trillion, and earnings of $374 billion. Now a lot of the criticism that companies get is due to people not understanding how financials work together. Some are focused on only a small component (Walmart's low wages or lack of health insurance, Exxon's "largest profits in history", Microsoft's monopolistic practices, even AT&T not limiting use of its phone lines). The common theme is that these companies are making billions in earnings and should be using them for something else.

The earnings that I mentioned above are before taxes. A large chunk of this is used to pay taxes. The corporate tax rate in the US is 35% . Now because of different tax laws and where the companies "earned" the money, they may be paying more or less than this. The top five earners of the DOW paid the following amounts in income taxes in 2008: Exxon - $36.53 billion, Chevron - $19.03 billion, Walmart - $7.15 billion, AT&T - $7.04 billion, Microsoft - $5.25 billion.

For those of you who are math challenged, even though the corporate tax rate in the US is 35%, Exxon and Chevron (those oil companies who do nothing for us) are paying out 45% of their taxable earnings in income taxes. (Most of this is due to the number of other governments that they paid income taxes to and the various tax liability in those locations). Take Exxon for a moment, $36.53 billion in income taxes. $3.8 billion of that went to the US or state governments. The rest went to governments of other countries. Before anyone cries foul, only $10 billion of the $82 billion in earnings was related to operations in the US. So, $3.8 billion is rather fair. What it more interesting is that of the $477 billion in revenue, $121 billion was from US operations. Basically, what this tells me is that operations outside the US are far more efficient at generating earnings (10/121 = 8.2% for US vs 72/356= 20% for international). So, even though there is effectively a higher tax on the earnings outside of the US (3.8/10=38% vs. 32.73/72=45%), because of the increased efficiency in generating earnings, the majority of operations occur outside of the US. Furthermore, any expansion of operations would make more sense to be outside the US since that maximizes income. In other words, if the US wanted to lure more of the operating dollars to the US (thereby being able to tax them), they would have need to lower the corporate income tax rate (I'll have to write another post on that one!).